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On Monday Wall Street and global markets were shaken by Cyprus’s plan to tax bank depositors to help fund a 10 billion Euro bailout of the country. A side effect of the move will pinch Russians.

Photo: Londonru.com

Those who’ve done business with Russia are familiar with the system of incorporating companies in Cyprus and moving money through Cypriot banks. The bailout plan will affect large amounts of Russian cash – $31 billion, estimated by the Moody’s ratings agency – and Russia is not happy about it.

Ties between Russia and Cyprus go back to the 1990s. The treaty between the republic of Cyprus and the Russian Federation has helped Russian businesses avoid double taxation and offered considerable advantages to businesses and individuals with offshore companies.

That said, the question is intriguing: why so much money? Some reported 22% of all Cyprus deposits. The answer is not that surprising: despite the legitimacy of the treaty, Cyprus has been viewed by many as a haven for money launderers and tax dodgers. It’s a perfect place save the money of questionable origin or to park it temporarily before it continues its journey to the west.

It was only last month that Global Financial Integrity, a research and advocacy organization,issued a report focusing on the size of capital outflow from Russia and its underground economy titled, “Russia: Illicit Financial Flows and the Underground Economy.”

According to the report, the Russian economy lost at least $211.5 billion in illicit financial outflows from 1994 to 2011. This stream represents the proceeds of crime, corruption and tax evasion, and has serious negative consequences for the Russian economy. 63.8% of these illicit financial outflows, or $135 billion, left Russia through unrecorded wire transactions, as measured by GFI's Hot Money Narrow (HMN) model.

In a phone interview with Forbes, Dr. Dev Kar, the lead economist and principal author of the GFI report, said that even though they couldn’t pinpoint one specific individual or company (after all, they are economists and not FBI investigators) while gathering the data, they saw that Cyprus played a big role in illicit capital outflow.

Dr. Kar said that the outflow of capital that could be taxed and used for economic development makes Russia’s economic growth unsustainable.

It seems that establishing offshore accounts is a means of avoiding economic uncertainty and corruption in the emerging country, as well as an attempt to avoid government attention. At the same time, it seems to be part of intricate mechanisms that contribute to corruption. And while the bailout plan will hurt Russia with its stability tax on deposits, the GFI report only confirms the obvious—Cyprus has been hurting Russia all along.

Meanwhile, Russia is busy attacking. "Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous," Kremlin spokesman Dmitry Peskov told reporters.